The great budget scare

Posted: Aug 21, 2001 12:00 AM
WASHINGTON -- In a capital city deserted in August, anxiety knots stomachs of Republicans left in Washington. They await with fear and loathing the midyear review Wednesday by the Office of Management and Budget (OMB). It is expected to show the government's estimated budget surplus reduced 40 percent to "only" $160 billion. The diminished surplus is caused mainly by an economy close to recession. Nevertheless, a $160 billion surplus would have been viewed at any previous point in the nation's history as miraculous during prosperity -- much more so in a decline. Yet Republicans cringe as they await a Democratic onslaught when Congress reconvenes after Labor Day. President Bush will be accused of creating a budgetary crisis by passing tax reduction, almost all of it taking effect in future years. The alleged crisis is that the Republicans now are "dipping" into the Social Security and Medicare "funds." Those funds do not exist in real terms, but the argument is irrationally made that the budget surplus would be all but erased if it were not for payroll taxes to finance Social Security and Medicare. Ability to strike fear in GOP hearts with the Great Budget Scare of 2001 is largely due to tireless efforts by the "North Dakota Twins": Kent Conrad, chairman of the Budget Committee, and Byron Dorgan, deputy Democratic floor leader. These remarkable senators, both former tax commissioners from a sparsely settled remote state, have imposed their fiscal theories on the government in a way that seemed impossible a few years ago. In repeated floor speeches, the North Dakota Twins over the years argued that there really is a trust fund for Social Security that was being ravaged for money by the rest of the government. Actually, all that drawers at Parkersburg, W.V., contain are government IOUs. William J. Quirk, an iconoclastic University of South Carolina law professor, describes more clearly than economists the futility of relying on these IOUs: "Government bonds held by the government have no value. They are not cash." In 1996, even Senate Democratic Leader Thomas Daschle conceded to me, in a moment of candor, that "there is no such (Social Security) fund per se." Ironically, the North Dakota theory took hold only after relative constraint on spending by the Republican-controlled Congress produced continuing budget surpluses. Republicans tried to outdo President Clinton in establishing a "lock box" to protect the Social Security fund. In the House, the GOP went even further in creating a lock box for Medicare, ignoring Medicare's existing reliance on money from the government's general fund. Thus, as the declining economy reduces surplus expectations, Republicans have found themselves trapped. Thanks to their lock-box commitment, they are susceptible to Conrad-Dorgan accusations of dipping into ephemeral trust funds. "There is no box or lock," says Professor Quirk. "There is a 'Social Security Trust Fund,' but it's empty." Members of the Bush economic high command -- Treasury Secretary Paul O'Neill, National Economic Advisor Lawrence Lindsey and OMB Director Mitchell Daniels -- surely understand this. But they cannot admit this, and so repudiate commitments of their Republican supporters in Congress. The GOP's only advantage is that the Democratic strategy also leads to a cul de sac. What is the alternative to alleged plundering of trust funds? Certainly not Draconian cuts in a Bush budget already viewed by Democrats as too lean. That leaves rolling back tax cuts, which would be madness in today's economy. No senator is more sensitive to criticism than Kent Conrad. So, he erupted in reaction to Lindsey's remarks at the Philadelphia Reserve Bank on July 19. Conrad had "hinted at a tax increase in 2002, just as the economy is recovering," Lindsey charged. On the next day, Conrad took the Senate floor to claim "a total misrepresentation of the record of this senator." Therein lies the answer to the great budget scare. If the spurious lock box is to be observed and spending not reduced, tax cuts have to be rolled back. President Bush's economic agents this week will be challenged to respond to a smaller surplus -- not with accounting tricks, but with affirmation that the goal of government is restoring economic vitality instead of debt-reduction.
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